In a small bit of irony last December when Enron Corp. had filed for bankruptcy, American Electric Power’s Eric van der Walde, the executive vice president of trading and marketing, said, “The wholesale energy marketplace is bigger and stronger than any one company. The market has performed well during these weeks of uncertainty about Enron’s future. We are confident that AEP and other leading wholesale energy providers can fill any market needs that may arise” (see Daily GPI, Dec. 3, 2001). That was then, this is now. And now is not so confident anymore.

Energy merchants may well refer to July 23 as Black Tuesday, after yet another tragic day on Wall Street, in which almost no company with a marketing and trading arm escaped unscathed. The day began with Dynegy Inc. reducing its 2002 outlook for cash flow; Duke Energy warning that it would not meet its earnings estimates for the year; and with El Paso Corp.’s off-balance sheet business transactions being questioned by the Wall Street Journal and The New York Times (see related stories).

Analysts followed with downgrades of several energy merchants, but perhaps the most devastating was a report by Banc of America analysts Tuesday in which 11 energy merchants were downgraded. “Due to ongoing risks that are impossible to quantify, the wholesale energy group continues to suffer the death of 1,000 cuts,” analysts William Maze and Shelby G. Tucker said. “Although we downgraded the sector at year-end, we did not go far enough, as we misjudged…risks which continue to rise…all brought on by the snowballing effects of Enron’s collapse” (see related story this issue).

Investors, apparently, could take it no longer. More than 33 million shares of Dynegy exchanged hands Tuesday (the usual volume is 7 million), and the company dropped as low as 91 cents, before rallying near the end to close at $1.23, off 64%. The week Enron filed for bankruptcy, Dynegy was selling for about $31.

However, Dynegy did not suffer alone. Every one of the 27 energy merchants that NGI covers lost value on Tuesday, including Reliant Energy Inc., 42%; Williams, 40%; Reliant Resources Inc., 39%; Mirant Corp., 31%; El Paso Corp., 23%; and Calpine Corp., 23%. Williams closed at $1.19. AEP, which months ago expected no fallout from Enron, was down almost 10% to close at $23.51; in December 2001, it was selling for $41.50. Even companies that so far have been unscathed by scandal or investigations were hit Tuesday, with TXU Corp. off more than 10%, while Dominion and Entergy Corp. were down about 9%.

As the never-ending negative news continued on Tuesday, the bond market also weakened, pulled down by the energy sector. Dynegy’s bonds fell the most, 10 points to a bid of 35 cents on the dollar, and were quoted at the same price regardless of maturity, a sign that the market expects a bankruptcy filing, according to traders. If Dynegy were to file for bankruptcy, the bondholders would rank equally in asset claims, regardless of maturity. Williams’ bonds were down about five points, and its 10-year paper was bid at 40 cents on the dollar, which was down five cents from Monday.

Dynegy, which was the first energy marketer when predecessor Natural Gas Clearinghouse was formed almost 18 years ago, made perhaps the strongest statement yet Tuesday that its energy trading business has hit the skids. CEO Dan Dienstbier admitted that “a strong investment grade rating will be required for this business to be successful in the future.”

Management is now “exploring strategic options” for the business, which could include creating an “independently rated joint venture” for its once well regarded trading arm. Dynegy also revised its fiscal 2002 operations cash flow to a range of $600-700 million, down from its previous estimate of $1 billion. Current liquidity ranges between $800 million and $850 million.

The Houston-based company has taken weeks of losses, and on Monday took it on the chin once again after Standard & Poor’s and Fitch Ratings downgraded its credit rating to “junk” status (see Daily GPI, July 23). Because of the downgrades, Dynegy subsidiary Illinois Power (IP) also pulled out of a $325 million mortgage bond sale that was scheduled to close Tuesday, and said IP “hopes” to complete the sale later in the third quarter.

“While we are certainly disappointed, we understand the agencies’ views and remain committed to re-establishing an investment grade credit profile,” Dienstbier said of the rating agencies’ actions.

Dienstbier said that the board of directors indicated last week that it was “satisfied with both the speed of execution and progress we have made on our capital and liquidity plan,” and attributed the reduced guidance to the downturn in its marketing and trading activities, “partially the result of industry conditions, and lower-than-expected prices for power, natural gas and natural gas liquids. The same fundamentals have also impacted Dynegy’s liquidity.”

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